Utilities Sector Looks Vulnerable

The defensive utility sector isn’t looking very safe at the moment, as the break below a key technical threshold suggests further weakness is likely in the days ahead.

The Dow Jones Utility Average, DJUA, fell 1.2% to a two-month low of 501 in midmorning trading Thursday. It has definitively fallen below the closely watched 50-day moving average line, or 50-DMA, after waffling around it the last couple weeks.

Some technicians use the 50-DMA as a gauge of the shorter-term trend, so closing below it is viewed as a warning of further weakness.

Ralph Acampora, director of technical research at Altaira Wealth Management, said the DJUA is now vulnerable to a decline of 4.2% from current levels to its 200-day moving average line.

The 200-DMA, which comes in at 479.72 Thursday, is seen as a guide to the DJUA’s long-term uptrend, which Acampora expects to remain intact despite the short-term concerns.

In the bigger picture, Acampora said the DJUA’s breakdown supports his view that investors are rotating away from defensive sectors and into more economically sensitive sectors. Basically, falling below the 50-DMA is a short-term “sell” for the DJUA, but could be viewed as a longer-term positive for the broader market.

Utilities are seen as defensive investments because their earnings streams remain relatively stable during different economic environments and tend to have higher dividend yields. Therefore, they usually outperform when investors become risk averse and underperform when they seek riskier investments.

The DJUA had been outperforming the broader market until about a month ago, as investors remained concerned over the health of the U.S. economy. It had gained 17% year-to-date through April 19, while the S&P 500 gained just 9%.

Since then, with investors now more worried that the economy is strengthening to the point the Federal Reserve may start paring back on stimulus, the DJUA has lost 5.1% and the S&P 500 is up 6.1%, and is still more than 3.6% above its 50-DMA.

Despite occasional signs of short-term weakness, Acampora believes the broader market is entering the second of the three phases of a long-term bull market: Disbelief, belief and exuberance.

“We’ve had four years of disbelief, and now we’re entering the belief phase,” Acampora said.